Investors and customers appear to be buying into Nortel Networks' new strategic direction, despite initial doubts that the Canadian telephone equipment maker, which employs 1,000 people in Galway, could transform itself into a next-generation networking company.

Nortel's shares tumbled last summer amid concerns about the company's expansion into data networking. And investor worries that the US$6.9 billion (#7.5 billion) acquisition of Bay Networks, the US maker of data networking equipment, would hit earnings, sent Nortel shares tumbling by about 60 per cent over five months.

But market sentiment has changed dramatically in the past six months. Analysts are encouraged that Nortel appears to be bridging the corporate culture gap, retaining key Bay staff and adopting Bay's quicker pace.

Investors are so encouraged by Nortel's prospects that the company's share price has more than doubled in the past six months, nearing its 52-week high.

The turnaround is evidence that investors, analysts and customers are moving to seize the technological high ground, says Mr Benn Mikula, a vice-president and director at RBC Dominion Securities. "There is a clear sense that Nortel is beginning to be a player in defining how networks will be built, and how technology will be integrated into a vision of the future."

Known until recently as Northern Telecom, a telephone equipment maker overshadowed by larger rivals in the US and Europe, the company stunned the industry last year by committing itself to the convergence between telecoms and data with its acquisition of Bay, which was losing ground to Cisco Systems, its larger datacom rival.

Much of the credit for Nortel's re-emergence goes to Mr John Roth, the chief executive who issued an internal memo more than a year ago announcing that Nortel would refocus on data communications. Observers say Nortel's move gave it a headstart in the race to become an equipment provider for the next generation.

In February, the company unveiled Succession Networks, technology that enables large telecoms carriers to overlay data networking capabilities on to their existing voice networks without having to scrap an estimated $1,000 billion worth of investments in the current networks.

Nortel's technology, compatible with about 90 per cent of existing network architecture, could help large carriers to make the transition towards building multipurpose networks that enable them to provide customers seamlessly with voice, data, video, internet and wireless services. It is under evaluation by Southwestern Bell, France Telecom, and AT&T.

Lucent has unveiled similar technology, although it is not compatible with networks built by other equipment makers. Analysts say Cisco, Nortel's other US rival, lacks the voice networking background the relationships needed to be a strong competitor in the large carrier segment. Nortel's European rivals, such as Siemens, Alcatel and Ericsson, are given little time to act if they are to remain industry forces.

Mr Roth has also hinted that his company could soon step on a few more toes by announcing an agreement to provide data networking equipment to a "major transnational carrier" in Europe.

But Nortel, like its rivals, faces several challenges. It must develop a more efficient method of transmitting data traffic across networks. It is also trying to develop a more affordable way for carriers to move from circuit technology, used for voice traffic, to packet technology, which is more efficient for data.

Another challenge is to develop an integrated wireline and wireless internet enabling users to hold conversations, access voice-mail and scroll through data banks, as well as send and receive e-mail through a cordless phone, laptop computer or other device. Mr Roth says his company will probably make a few more small acquisitions to "fill some holes".

Maribel Lopez, an industry analyst at Forresters, says Cisco, Lucent and Nortel are most likely to develop the technology that will enable carriers to build next-generation networks.

Many industry analysts would argue that Nortel's inclusion in such a select group speaks volumes about Mr Roth's foresight.

Now he must demonstrate that the expectations are well founded.